Project Ketchup: iBuying Is Just Fine, Zillow Was Not

I’m still traveling around the country, but wanted to jot something down real quick from a random hotel room in Houston.

Based on this story in Business Insider about Project Ketchup, I’m expecting fantastic things from Opendoor’s earnings call. [Note: I own OPEN in my personal portfolio.] All of the jubilation from the industry about how algorithms suck, how you must have a local expert, etc. was premature.

The failure of Zillow Offers seems like it was not a failure of the algorithms. It was an all too familiar and all too human failure over there.

The value proposition of iBuying remains as solid as ever, and the algorithms are working just fine.

Project Ketchup

In brief, according to the Business Insider article, the reason for Zillow Offers spending like our Federal government is because of Project Ketchup, a major initiative to “catch up” to Opendoor. It had little to do with algorithms. It wasn’t the computer spitting out a too-high price, but the human managers overruling the computer and mandating too-aggressive bids in order to get market share.

But what’s really mind blowing is that Project Ketchup wasn’t funded properly, leading to shortchanging contractors who were supposed to work on the houses before they can go on the market.

The higher prices that Zillow was paying left it with precariously thin budgets for repairs, the source, along with another current employee and a contractor who works with the company, told Insider.

The contractor, who also worked in Southern California, said Zillow began to reduce the price it was willing to pay for specific types of renovation work and shrink the scope of many jobs. Those adjustments, rolled out across the company’s sprawling portfolio of homes, began to strain the relationships it had with hundreds of contractors whom it relied on to fix up the homes it bought and prepare them for resale.

Employees said contractors who were used to tackling a few jobs at a time for Zillow that totaled in the tens of thousands of dollars, were asked to complete as many as dozens of jobs a month, each one now paying only a few thousand dollars. Contractors had to manage a growing number of construction projects across a wider geography and buy a host of materials for a variety of repairs. The work, employees added, was less profitable and more taxing logistically.

The Southern California contractor, along with another contractor in Texas, said that other iBuyers, such as Opendoor and Redfin, often paid more for the same work, which prompted some to de-prioritize Zillow jobs or cut ties with the company.

OMFG. Are you kidding me?

So… on the one hand, Zillow launches a major initiative to take market share, even at a loss, since Business Insider quotes a company accountant who told them that “managers were not concerned” and that “[Zillow] had made it clear that it expected to lose cash to grow market share.” That’s actually smart. Use your balance sheet advantage, and take market share even at a loss.

But on the other hand, they don’t budget more for contractors? And no one anywhere raises his hand and says, “Hey, uh, it’s cool that we’re winning more bids but, we can’t fuck over the local contractors we absolutely NEED to have these homes ready for sale!” That’s not smart. That’s downright idiotic. WTAF?

As the contractor quoted says, Opendoor and Redfin (and presumably Offerpad and other iBuyers who were not brain dead) paid appropriately and on time. If Zillow didn’t do that, that has literally nothing to do with algorithms, with the iBuyer business model, or even with overpaying. As my wife, who used to work in construction and architecture and knows that space and those personalities pretty well, points out, once you screw over one contractor, you can expect all other contractors in that area to know not to do business with you within days, if not hours.

Zillow could have overpaid by tens of thousands of dollars. If Zillow had not also alienated the contractors, it would have been just fine. This is a purely managerial fuckup, nothing more and nothing less.

Covid? Labor shortage? Supply chain issues? Nonsense on stilts. How about, “We decided to screw over the very people we really, really needed to get shit done for us on time.”

Oh, and those people you decided to shortchange? They have so much demand for their services right now that they’re booked out for months and months in advance. Sunny and I have been looking to book HVAC maintenance for our place in Utah for months now. There is a labor shortage going on, so if you happen to get a good contractor, the very last thing you want to do is to screw with them.

Everybody is Playing Word Games

I just saw that the CEO of Offerpad was opining that Zillow’s problem was that it tried to grow too fast. I’m sure Opendoor will say something similar, how they took a more conservative pricing approach, and so on. Various Wall Street analysts, like Jim Cramer, are squawking about how they knew, just knew, that Zillow’s business model was flawed. Apparently not convicted enough to short Zillow, but yeah, it was the business model that was flawed. It’s about capital, about technology, about needing local experts in local markets.

All bullshit. All narrative.

The real reason for Redfin’s banging Q3 from iBuying, and the real reason for what I expect will be a killer Q3 from Opendoor, is that those guys decided to pay the contractors fairly and on time. Sure, pricing probably had something to do with that as well, but look, we’re in a 15-25% YOY home price appreciation environment. And market making is not home flipping, as I’ve said over and over and over again. The algorithms probably spit out the correct valuations. As long as Opendoor’s managers didn’t overrule what the multi-billion dollar data/AI system recommended, I’m sure Opendoor did just fine.

And as long as Opendoor didn’t alienate the contractor community, I’m sure they did just fine.

Dance on Zillow’s Grave If You Want…

So, those brokers and agents dancing on Zillow’s grave… you do what brings you joy. But if you want to extrapolate from that to saying that iBuying as a whole is broken, is busted, and won’t work… well… you do what brings you joy.

In fact, I am even more bullish on market making as a business model. Even with the entirely human screwups, Zillow only lost $304 million from inventory writedowns? The inventory was $3.8 billion at end of Q3, presumably AFTER the writedown. So less than 10% impact.

As long as you don’t make entirely obvious unforced errors, like screwing over contractors, even an unexpected market slowdown should result in far less than 10% of valuation dump. That smells like a win to me, as an Opendoor shareholder, and as the biggest iBuyer bull in the industry.

That’s it for now. Next dispatch from Austin tomorrow (I hope).

-rsh